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Chemed's (CHE) Roto-Rooter Growth Aids, Macro Challenges Ail

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Chemed's (CHE - Free Report) Roto-Rooter business has been registering robust performance over the past few quarters. A good solvency position buoys optimism. Yet, headwinds like seasonality in business, competitive landscape and dependence on government mandates are intimidating. The stock currently carries a Zacks Rank #3 (Hold).

Over the past year, Chemed has outperformed its industry. The stock has gained 1.4% against the industry's 36.3% fall. Chemed ended the second quarter of 2022 with better-than-expected earnings. The year-over-year growth in adjusted earnings per share appears promising.

Robust performance by the Roto-Rooter segment drove the top line. Roto-Rooter is currently the nation’s leading provider of plumbing, drain cleaning services and water restoration, providing services to over 90% of the U.S. population. The company recorded substantial increases in drain cleaning, plumbing, excavation and water restoration revenues in the quarter under review.

Management believes Roto-Rooter is well-positioned for growth post-pandemic and anticipates continued expansion of the segment’s market share, banking on the company’s core competitive advantages in terms of brand awareness, customer response time and 24/7 call centers and Internet presence. A notable e-marketing initiative by Roto-Rooter is to expand brand awareness among younger audiences by placing advertisements and content on various social media platforms, including Facebook, Instagram and YouTube.

Chemed has been registering strong performance in the VITAS business over the past few quarters. Although the segment's revenues declined during the second quarter, it was somewhat offset by a geographically weighted average Medicare reimbursement rate increase of nearly 1.3%.

The company’s second-quarter operating results reflected good earnings performance for the VITAS arm, which exceeded its internal estimates despite the persistent pandemic-led disruption. The company’s latest admission data suggested that senior housing is in the process of stabilization and recovery. The company’s 2022 outlook anticipates a continued acceleration in the senior housing base census throughout the year.

On the flip side, Chemed’s VITAS revenues registered a 4.5% year-over-year decline in second-quarter 2022, raising apprehension. The VITAS arm continued to be challenged by pandemic-related issues, including health care labor shortages, disruption in senior housing occupancy and related hospice referrals. In the reported quarter, VITAS admissions totaled 14,735 patients, down 12.5% on a year-over-year basis. The company also witnessed a 20.5% decline in hospital-directed admissions compared to the year-ago period.

The deterioration in short-term cash levels is worrisome. The persistent macroeconomic headwinds related to the volatility in COVID-19 trends, rising inflationary pressure and other challenges continue to hamper business performance. A competitive landscape and reimbursement headwinds are other challenges.

Further, during the second quarter, Chemed’s average daily census was 17,315 patients, a decline of 3.8% year over year. Per management, this decline directly resulted from pandemic-related disruptions across the entire health care system since March 2020.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. (AMN - Free Report) , Patterson Companies, Inc. (PDCO - Free Report) and McKesson Corporation (MCK - Free Report) .

AMN Healthcare has a long-term earnings growth rate of 3.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.7%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has lost 11.2% against the industry’s 38.2% fall.

Patterson Companies has an estimated long-term growth rate of 7.9%. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 16.5%. It currently has a Zacks Rank #2 (Buy).

Patterson Companies has underperformed its industry in the past year. PDCO has lost 17.4% compared with the industry’s 14.8% fall in the past year.

McKesson has an estimated long-term growth rate of 9.9%. The company surpassed earnings estimates in the trailing three quarters and missed in one, delivering a surprise of 13%, on average. It currently carries a Zacks Rank #2.

McKesson has outperformed its industry in the past year. MCK has gained 77.5% against the industry’s 14.8% fall.

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